Eurozone recovery fragile but no deflation risk: ECB's Praet

Eva Taylor, Paul Carrel

3 Min Read

FRANKFURT (Reuters) - There is no risk of deflation visible in the euro zone economy but its recovery is fragile with inflation low and credit subdued, ECB Executive Board member Peter Praet said on Tuesday.

European Central Bank Executive Board member Peter Praet gives a speech during a meeting organised by the Grand Conferences Catholiques in Brussels January 14, 2013. REUTERS/Eric Vidal

The ECB cut interest rates to a record low earlier this month and said it could take them lower still to prevent the euro zone’s recovery from stalling after inflation tumbled to 0.7 percent - well below its target of just under 2 percent.

Praet, who last week raised the prospect of the ECB starting to buy assets to bring inflation closer to the target, said inflation in the euro zone is low but inflation expectations solidly anchored.

A cyclical upswing in the euro area “is confirmed”, he added.

“Things are improving, but it is still a fragile environment,” Praet, who is in charge of the ECB’s economics portfolio, said in a presentation at the Euro Finance Week conference in Frankfurt.

Asset purchases - or quantitative easing (QE) - is a policy that has already been pursued by the U.S. Federal Reserve, the Bank of England and the Bank of Japan but such measures are extremely divisive among the 23 members of the ECB’s Governing Council.

Last week, Praet also suggested the ECB could cut deposit rates into negative territory, essentially charging banks to place their money with it. Markets do not expect such a scenario to unfold, however.

A Reuters poll of money market traders showed the vast majority did not expect the ECB to cut its deposit rate below zero.

Asset purchases and cutting the deposit rate into negative territory are policy responses the ECB could use to tackle a threat of deflation, a debilitating spiral of persistently falling prices. Praet said he saw no risk of deflation at the moment.

“Monetary policy has succeeded in providing a stable nominal price anchor and also has succeeded in addressing episodes of risk of de-anchoring of inflation expectations,” he said.

“We had several episodes where we measured in market prices the fear of deflation, which we don’t see today.”

Praet proposed this month’s rate cut and was supported by ECB President Mario Draghi, insiders say.

He told the conference there was a lot of discussion among the ECB’s policymakers about the timing of the cut but not much difference between them on the analysis of the economic situation.

Another ECB policymaker, Austrian central bank chief Ewald Nowotny, said on Monday there is no need for the ECB to respond with immediate policy reactions to below-target inflation.